Atlantica Sustainable Infrastructure's (NASDAQ:AY) Returns Have Hit A Wall

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Although, when we looked at Atlantica Sustainable Infrastructure (NASDAQ:AY), it didn't seem to tick all of these boxes.

Understanding Return On Capital Employed (ROCE)

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. The formula for this calculation on Atlantica Sustainable Infrastructure is:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.033 = US$297m ÷ (US$9.8b - US$824m) (Based on the trailing twelve months to December 2021).

So, Atlantica Sustainable Infrastructure has an ROCE of 3.3%. In absolute terms, that's a low return but it's around the Renewable Energy industry average of 3.8%.

View our latest analysis for Atlantica Sustainable Infrastructure

In the above chart we have measured Atlantica Sustainable Infrastructure's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Atlantica Sustainable Infrastructure here for free.

So How Is Atlantica Sustainable Infrastructure's ROCE Trending?

There hasn't been much to report for Atlantica Sustainable Infrastructure's returns and its level of capital employed because both metrics have been steady for the past five years. Businesses with these traits tend to be mature and steady operations because they're past the growth phase. So don't be surprised if Atlantica Sustainable Infrastructure doesn't end up being a multi-bagger in a few years time. That probably explains why Atlantica Sustainable Infrastructure has been paying out 326% of its earnings as dividends to shareholders. Most shareholders probably know this and own the stock for its dividend.

The Key Takeaway

In summary, Atlantica Sustainable Infrastructure isn't compounding its earnings but is generating stable returns on the same amount of capital employed. Yet to long term shareholders the stock has gifted them an incredible 113% return in the last five years, so the market appears to be rosy about its future. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.

Atlantica Sustainable Infrastructure does have some risks though, and we've spotted 1 warning sign for Atlantica Sustainable Infrastructure that you might be interested in.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.